Early Retirement // Financial Independence // Adventure // Happiness

The Problem with the HSA (Health Savings Account) Isn’t the HSA

Health savings accounts (HSAs) — the magical unicorns of “tax efficiency” — have quickly become the darling of the early retirement movement, and it’s easy to see why: the money that you put into them is never taxed, ever, and it dodges several other hoops you have to jump through with other tax-advantaged accounts. For a person who’s young and healthy who can sock money away in an HSA, they can be an effective way to save for retirement health care expenses.

Here’s the thing, though: they’re not great for everyone.

In fact, they’re not great for most people, or for most stages of life.

Setting aside the question of whether HSAs are good policy, or whether they help average earners save for health care (they don’t, just like 401(k)s and IRAs don’t help average earners save for retirement), let’s focus instead on whether people with sufficient means to save for early retirement or financial independence should opt for a HSA or not.

(Spoiler: They shouldn’t.)

Quick refresher on health savings accounts: As podcasters, bloggers and various financial experts love to remind us all, HSAs are “triple tax-advantaged,” meaning the money you put into them isn’t taxed, that same money isn’t taxed when you take it out and you aren’t taxed on the gains or earnings. (Though FYI that contributions are still taxed in California, New Jersey and Alabama, making them more like Roth accounts at the state level in those places.) HSAs can be used as a savings vehicle (money kept in an interest-bearing account), or as an investment vehicle (invested in mutual funds or stocks). Anyone can contribute to your account, most especially your employer. And you can keep the account forever, without ever having to spend it down, meaning no required minimum distributions (RMDs). HSA funds can only be used for “qualified medical expenses,” which is a plenty long list that includes nearly everything you’d think of as health care expenses, but it does not include the most common expense of all: health insurance premiums. Of course, to be eligible to save in a HSA to begin with, you must first be enrolled in a high-deductible health plan (HDHP), something the law defines as greater than $1,000 per person, but the plan must specifically be designated as an HDHP to count.

And that, friends, is where the problem lies. Just like the problem with the 4% rule isn’t the 4% rule, the problem with the HSA isn’t the HSA. The problem is the deductible.

The Devil’s In the Deductible

Insurance deductibles are a big deal, and not just because they tell you how much you are on the hook for before insurance will kick in. But because they’re also a huge predictor of behavior, in this case negative behavior that can have lasting impacts. I’ll get to that, but for now just go with the idea that big deductibles are a problem.

On the surface, the HSA rules seem to solve the problem a deductible might cause by giving you a triple tax-advantaged way to pay that deductible. A HDHP is defined as having “only” a $1000 deductible, and the current HSA contribution limit per year is far greater than that, at $3,450 for an individual, or $6,900 for a family. Neat! (Assuming you are diligent about saving that, anyway.) But the law’s definition and reality have diverged significantly in recent years. Currently, very few plans have such low deductibles anymore. Our non-HDHP PPO plan has a $5000 deductible, and that’s not considered “high.” In fact, most deductibles for high-deductible plans are now higher than the HSA contribution limit. Kaiser Family Foundation data show that deductibles are rising almost six times faster than wages, and 10 times faster than inflation.

Source: KFF and HRET

Take, for example, the deductibles for the HDHPs available on Covered California, the largest state exchange:

The plans are cheap (I’ve plugged a $50,000 annual income into the calculator to get these premiums, but the deductibles aren’t tied to income), but the deductibles are significantly higher than the HSA limit — by almost $3,000 in a year for a family.

If you can afford to cash flow your health care costs without dipping into your HSA, because you intend to let the HSA funds grow instead of spending them, or if you use a high-deductible plan with the intent of not using much health care, none of this may seem like a big deal. But it is. Because: research finds that people with high-deductible plans don’t use the free, preventive care they’re guaranteed by law. And they put off other care that they actually need, which can have detrimental effects. The idea behind HSAs was to make patients consumers, and give us more skin in the game to control health care costs. But turns out, we’re pretty lousy health care consumers. Even the smartest, richest ones among us.

According to Kaiser Family Foundation, “High deductibles have actually forced people to delay care that could prevent health emergencies later or improve their quality of life.” A UC-Berkeley and Harvard study concluded that “people with high-deductible plans spent 42 percent less on health care before meeting their deductibles, primarily by reducing the amount of health care they received, not by shopping around for a better price.” [emphasis mine]

According to a study published in the Quarterly Journal of Economics that looked at consumer behavior after switching from a traditional plan to a HDHP with HSA, and written in the artful prose only economists master, “We find no evidence of price shopping in the first year post-switch. We find no evidence of an increase in price shopping in the second year post-switch; consumers are not learning to shop based on price. Instead, we find that essentially all spending reductions… are achieved through outright quantity reductions… whereby consumers receive less medical care. These quantity reductions persist over time.” (Translation: Rather than try to get the best deal on care, people just get less care, and that’s not just while learning the ropes of the new plan.) They add, “A meaningful portion of all spending reductions came from well-off consumers who were predictably sick, implying that the true marginal prices they faced under high-deductible care were actually quite low.” (Translation: It’s not just poor and middle income people who reduce care in the face of a high deductible.) Finally, they confirm, “Despite the fact that preventive services are free both before and after the switch to high-deductible care, we find that consumers meaningfully reduce consumption of these services.”

That’s multiple, credible studies that conclude that high deductibles make us all avoid getting health care, including the preventive services like checkups, immunizations and screenings that are free. It’s not hard to see why that’s a problem: you’re putting off treating something until it’s more serious, when it might be harder and more expensive to treat, and you’re missing out on the opportunity to be diagnosed early for something that could be impossible to treat if not caught early on.

This is not something that just affects people who struggle to pay, as the economists show. It also affects those who just don’t want to pay, which likely describes every financial independence-focused person. If the doctor visit you might once have paid $20 for is suddenly $100, $150 or maybe entirely a mystery because you don’t actually know what a doctor visit costs with insurance kicking in nothing, that’s a very different proposition. It’s why, according to Kaiser, “studies dating to the 1970s have consistently shown that when consumers must spend a big chunk of their own money on their care, they can cut back by as much as 15 percent. That slowdown happens fast, dropping like a health care guillotine.”

Consider the story of Ashish Jha, a physician and Harvard health policy researcher. To understand the question of what happens psychologically when patients take on a higher share of the costs of a given medical encounter, he switched himself and his family to a high-deductible health plan, with a $6,000 deductible. Not long after, he experienced a racing heart that he couldn’t settle, something he knew very well could lead to a heart attack. But rather than go to the hospital — and have to pay that deductible — he decided to just hope for the best instead.

His wife asked what he’d recommend if a patient called with the same problem. “I said, ‘Oh, that’s easy.’ Go to the emergency department.”

This is a doctor who studies health policy and health care decision-making at Harvard who made what he readily admits was a very dumb choice in the interest of an amount of money that would seem so trivial if he had had a heart attack or died over it. The one and only upside is it gave him insights to use in his research into the impact that high deductibles have on our health care decision-making.

“What I take away from [his] story,” said Amitabh Chandra, a friend and fellow Harvard health policy economist, “is that simply calling the patient a consumer doesn’t make buying health care anything like buying cars and computers.”

Last year, Chandra and three colleagues looked at what happened after a Fortune 100 company switched 75,000 well-paid, tech-savvy employees into high-deductible plans. What they found closely mirrored Jha’s personal pattern.

Workers — both the healthy and the sick — skipped out on care indiscriminately. “Prevention, imaging or drugs, consumers were cutting back on all those,” Chandra said.

“That’s a sign they don’t really know what care is valuable and what care isn’t valuable.”

High-deductible supporters argue that consumers need time to adapt and more tools that will help them price-shop effectively.

The researchers considered that, too. The company put $3,750 into a health savings account for each employee and provided a state-of-the-art online tool to compare prices for tests, doctor’s appointments and other services. “We found no evidence that consumers were learning to price-shop after two years of high-deductible coverage,” Chandra said. “None.”

“They don’t really know what care is valuable and what care isn’t valuable.” That line should humble all of us. We’re trained to think we’re savvy consumers, and we assume that we can translate that skill to managing our own health. But it turns out we can’t.

And in the face of high deductibles, we increase our chances of cutting out care that’s actually necessary because we assume we can tell what care will actually help us and what care won’t. Even when we’re comfortable financially. Even when our HSA is well-funded. Even when we’re smarter than average. Even if we’re sick and know we need care.

High deductibles make smart people do dumb things.

Consider Your Own Situation Carefully Before Opting for a HDHP and HSA

The research on deductibles should give everyone considering a HDHP over a traditional comprehensive insurance plan pause. But there’s more to consider beyond just the (massive) psychological barrier that the deductible poses.

For example, investment options are more limited with HSAs than with other tax-advantaged accounts, and they most often come with significantly higher fees than your 401(k). (You remember what fees do to your gains, right?) According to Morningstar, “Health savings accounts are a very under-researched corner of the market. Investors have few resources available to help them navigate the hundreds of plan providers that exist.” If you wish to invest your HSA funds instead of simply saving them, you’ll likely face trading fees and investing fees on top of management and fund fees, and not a lot of help to track down lower fee funds.

In addition, most people trying to use HSAs for their tax advantages will likely want to invest the money they sock away, not just put it in a savings account. And then you run into the same problem you have with any investments: they might be doing badly when you need that money. But unlike other investment accounts, you can’t easily optimize the timing of when you sell shares or convert from one vehicle to another. You can only use that money to pay directly for medical expenses, so at best you can only hope that your big expenses will occur when the markets are up.

Of course, there are those tax benefits, and for some that will be the deciding factor, no matter how much research I throw up here about how high deductibles harm our decision-making ability. And that’s fine. Do what’s right for you. But actually think through your situation and your own tendencies before you go for the HSA option.

And consider perhaps the most salient point of all from a personal finance perspective: experts who’ve analyzed this stuff say that, considering all factors, most people come out ahead on a traditional health insurance plan with a lower deductible, not an HDHP with HSA. That’s before you assign a value to your health and factor that in.

Bottom Line

While high deductibles might be fine for homeowners or car insurance (which are true insurance, because your intent is not to need them), they are bad for your health.

If you have a choice between a traditional comprehensive plan with a manageable deductible, and a high-deductible health plan with a deductible that makes you not want to go to the doctor, opt for the lower deductible option, even if it comes with a higher monthly premium.

Of course, if your only health insurance plan option is one that qualifies as a HDHP, then by all means take advantage of the HSA! If your employer offers a match, do just as you would with your 401(k) and save at least enough to get the match. (Free money! But not free money that outweighs a lower deductible.)

If you’re in your 20s, have no dependents and are completely healthy — and your employer kicks in at least $1000 toward your HSA — then experts say you could come out ahead rolling the dice on health care expenses, but only if you can afford to pay for the full cost of your out-of-pocket maximum, which is often only a bit higher than the deductible because it’s capped by law.

And even then, think of the HDHP as a temporary approach that will allow you to sock some money away in an HSA for a few years before switching to more traditional insurance.

In any other circumstances, do all the math before you go with a high-deductible health plan just because the HSA comes with those magic-sounding words, “triple tax-advantaged.” It could be quintuple tax-advantaged and it still wouldn’t make sense for everyone.

And no matter which choice you make, use your free preventive care!

Chime In!

What’s your take on HSAs? Do you have one? Are you considering switching to a high-deductible plan to get access to an HSA? Have you had an HSA and made the switch to a more expensive but lower deductible plan? Wherever you land on this stuff, we’d all love to hear your perspective. Share away!

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I opted for HSA because over the last few years, we have hardly needed to get any medical help. We get free yearly check ups every year, and i’m sure that has helped with regards to preventative treatment.

We are still in our late 20’s but we will continue to evaluate as we get older, i wouldn’t be opposed to switching if need be in the future. Also our yearly deductible is currently less than $7K i believe, so for now it makes sense for us. But i definitely see your point… The devil is in the deductibles!

Excellent analysis Tanja. I’ve never had an HSA as I still have decent coverage with my employer plan that does not even have a high deductible option. But consumer behavior is a huge factor here, and the examples above should serve to force people to examine their own habits.

Many people (esp men) don’t go to the doctor when something’s wrong even if they DON’T have a high deductible. My Dad died of cancer because he waited too long to see a doctor when he knew something was not right, and he had a good health plan. Unfortunately he also had what I call “tough-guy syndrome”, and just didn’t want to go to a doctor.

Thank you for your detailed analysis, I got a lot of criticism last year when I pointed out that most HSA investment accounts have pretty high fees (mine are finally coming down at work as assets grow, but I work for a Fortune 500 company). My biggest issue isn’t the consumer choice part of healthcare as much as the total contributions. If my fairly good MegaCorp policy has a $5,000 deductible and $10,000 out of pocket max for a family, its tough to build an HSA balance unless you’re maxing it out really, really young. The only way this game works out is to have the means and knowledge to max this thing out in your 20s. We happen to be one of the few who did that, but expenses have exceeded contributions for 3 of the past 4 years in our 30s and a few of those years were by a lot, so the balance is slowly coming down even with great years in the market

Interesting post. I hadn’t given too much thought to the implications a high deductible has on the consumer’s likelihood of seeking treatment and preventive care. The plans don’t seem so attractive when you put it that way!

My family is in a strange situation. My wife and our baby are on her employer-sponsored plan, which is a traditional plan. I am on an HSA by myself. Our total monthly premium is actually lower if we are on separate healthcare plans, and I am on the HSA simply to max out my contributions. I am in my early 30s and healthy. As of now, my goal is to do this one or two more years, and then go onto my wife’s plan and let the HSA balance grow until we will need it someday. Does this make sense?

I did the exact same thing. Makes sense to me. However, I took this as a middle of the road approach since I could have gone even further and put the baby on my health plan (HDHP) and left my wife on her employer’s traditional (they do not offer an HSA) which only comes out to a slightly higher family-wide premium but is more than offset by the extra contributions I would be able to max out as well as my employer making larger matching contributions for a family as opposed to an individual. I decided not to go that far as the baby will presumably have higher health care costs than us over the foreseeable future so I feel comfortable having him on a traditional plan.

It is strange – the situation you and I are in seems to be a result of employers more heavily subsidizing health care costs for employee only vs family coverage. Not sure why their subsidies are not at least proportionate. The downside is our family-wide deductible is larger than if we were all on one plan, but then again we are healthy and do not plan to meet the family-wide deductible. We will switch to one plan in a few years anyway.

It is also virtually impossible for a regular person to “price shop” because even doctors offices have no idea how much a visit or a procedure is going to cost until after it is done. And so much of the cost depends on the insurance that you have. I’m actually surprised that in the study you quoted, there was some kind of database to compare costs – I wonder how accurate it was. A few years ago, I was trying to decide which year to do some elective surgery (December in one calendar year versus January in the next). Not a single provider — nor my insurance company – could tell me what the cost of the procedure would be.

This!!!!! I don’t understand why more people aren’t talking about THIS POINT. I tried shopping around for the best hospital to have my baby. They were baffled by my question of “how much would a normal delivery cost me?” They wanted to know all my insurance information to even start giving me a vague answer. In the end my completely uneventful hospital birth was billed for $34,000. That’s leaps and bounds beyond the “area average” of $9,000-12,000 that my company-supplied “healthcare cost predictive tool” told me it would be. I tried to do what we are all told that smart healthcare consumers do. It didn’t work.

Great post! As someone who retired early, I do believe a couple of advantages to the HSA exist that may be of value to others on the path.

Although Health Care premiums can not be paid with the HSA, COBRA Premiums can be. When we transitioned to Early Retirement we chose to cash flow the ~25K in COBRA premiums for 18 months until we move to the ACA plans. This means I now have receipts and access to 25K of funds that are currently invested in my HSA should I ever need them. This money is now part of our invested emergency fund in that I could get access to the funds easily or just use the HSA to pay for emergency health care needs. We are a family of 4 with two young kids, so our most likely emergencies will be medical related.

As someone that retired early the HSA is also one of the only tax advantaged accounts that someone without “Earned Income” can still take advantage of.

My family consists of 40+ couple plus 3 kids (16, 13, 5) so I debated 3 years ago HDP vs traditional. I get my insurance through my employer but the HDHP deductible is 4,000 for family but the traditional also has a relatively high deductible of (I think $2,000 plus much higher premiums) plus my employer fronts $800 to HDHP. I have not been able to “save” any significant money as a investment tool as one medical emergency wiped out our HSA savings and then some (I have not maxed out contributions as am still in beginning my FI path and paying down debt). I also see some of this psychological approach of spending on healthcare as my husband and I just discussed delaying an “elective” but improvement of quality of life procedure due to unknown but likely very expensive costs. Not sure if I am making the right decision on health plan, I suppose I could up the contributions to cover the deductible at the least.

I have been very happy with our HSA and associated high deductible plan, but to your point we are relatively healthy and relatively high income. We felt when the plans first came out what some 15 years ago now that it might be a good idea to set some money aside. And again, to your point, Obama said something (inadvertently I’m sure) very true when he was jamming his health care scheme down our throats – that at some point we will all need health care. It’s not like buying a car where most of us will probably do it, but with diligence and creativity can avoid. Health care is going to be needed.
To me, and I realize I am an aging right winger, one of the bigger problems with health care is the complete INability to do any type of comparison shopping. It’s not that I don’t want to. It’s that I can’t. Go into any (or at least most) other types of businesses and you come away with a close estimate of potential costs. Cars, groceries, etc.. Even lasik surgery or elective plastic surgery. You can go in and get a number. Try that with a knee or hip replacement. Or setting a broken arm. And I’m not even asking for a set price. “Just give me a ballpark figure, Doc”. “Sorry – can’t do it.”. Why can’t health care be like any other industry and give us a price? And don’t say because you have no idea what other problems will crop up once you get started. Try remodeling a house – other problems crop up everywhere and other industries figured out how to deal with it.
And what is wrong with choices in health care? For the life of me I can’t understand why when it comes to health care there is this fight over having choices. If I want an HSA eligible plan with a high deductible, fine. If I don’t want insurance at all, then fine (but perhaps with the caveat that I must prove that I can afford to be without insurance – a bond or something). If I want a traditional health care plan with every coverage available – great. Or choices in what is covered. If I have never had a drink in my life, why am I forced to buy coverage for alcoholism?
“Well if healthy people don’t pay high prices for coverage they don’t need, sick people will have to pay more!” Doesn’t that mean that if I don’t pay higher prices for a loaf of bread or a dozen eggs, poor people will have to pay more? Perhaps since I have money, there should be a 15% surcharge on the purchase price of my home so that the prices of more affordable homes can be lowered.
I’m not heartless, truly I’m not. I do believe we live in a rich country that needs to take care of our most vulnerable. But I question how we are going about it on this issue. If you are born with or develop in life severe health issues – especially ones completely outside of your control – then yes, we need to find a way to take care of you. But perhaps not with insurance. If my neighbor has a child born with a hole in her heart, I want to see the child live and thrive, but it is not right to raise my health care premiums to do it. It’s not my child nor is any other person’s child who happens to have a policy with the same insurance company as my neighbor. But it does benefit us as a nation to help that child to live the fullest life possible. There should be a safety net for folks to fall into funded by taxpayers. But for the rest of us, health care should be just like anything else – market driven. Adam Smith said it centuries ago and it is still true. A doctor, just like the butcher, doesn’t give you to best service possible at the best price possible because of some noble calling. He/She does it because it is in his/her self interest to give you the best service possible for the lowest price. If the doctor (or butcher, shoe salesman, car dealer, etc.) didn’t do that, you would head on down the road to someone else. It is in that person’s best interest to be the best at what they do.
The United States is not just the best country on earth. We are the best country in the history of the world. And one of the biggest reasons, I believe, we are is that we set up a government that completely unleashes the creativity of our people. It is a bad idea to try to stifle that creativity. I promise you that health care is like anything else. It will be solved by an “all of the above” approach. Trying to jam health care down my throat by forcing me to use the same program as a person with a fraction of my income or net worth will not work just the same as trying to squeeze my 300 lb fat tail into a tiny electric car seat will not work. Government does a fantastic job at certain tasks, but not business. Our government is just not good at business And at it’s heat, that is what health care is – a business.
I do enjoy your blog and am looking forward to your book. You are a very talented writer. Keep up all the good work.

Ugh! Your comparison of buying health insurance to that of buying bread is completely off the mark. No one will die if they live a life without bread but those who have a health issue and can’t see a doctor may very well die. If everyone buys insurance then it becomes more affordable for everyone. I’m an owner of a small business and I pay for healthcare insurance for my staff. I certainly get more reasonable rates because everyone elects to be covered. My entire staff is young and healthy and some probably would chose not to be covered and take the money instead. For the betterment of all they get insurance crammed down their throats.

I disagree. Food ranks very highly on what a person needs to live. Not as high as water, but right up there. Perhaps even higher than health care. Maslows’ hierarchy even pointed that out year’s ago when defining how to be happy. Food and shelter are basic requirements for happiness and for health. Whether or not you like the bread example is of no importance. Put in any example you like. The idea I am against is the “we’re all in it together” idea. You can attempt to do it with anything – health insurance, food, shelter, cars, etc. Take shelter. Assume a nation where no one is allowed to own property/shelter. All property is allocated based on a “fair” monthly premium all are required to pay. By doing that everyone from Bill Gates to the homeless drug addict gets a roof over his head. You can get a bigger or nicer place – maybe you can call it a gold level house – if you want or can afford a higher monthly premium. If you are really poor, the government will supplement your premium based on your income. Or you can do it with food, or health insurance, or anything.
But it won’t work. It’s called socialism and it’s doomed to fail.
Again, we need a safety net. A country such as ours is wealthy enough to provide that. I am just of the mindset that forcing people into buying a product is not the way to do that. We are a large country with a lot of people of various means and talents. The market is the best way to satisfy all those varying needs be it healthcare, food, or shelter. And beneath the market we need a safety net for those that fall through.
A rich country such as ours should take care of its most vulnerable. In my opinion we need to find a way to do it without destroying the fabric that made us great.

You said bread not food. And people have options on how, where and what to buy food so I go back to that being a bad comparison. Also, the insurance industry requires us to approach buying insurance as though “we are all in this together.” Anyway, I believe that living in a society we need to approach certain aspects of life (public health and safety being two of those aspects) as “we are in this together”. There is nothing wrong with a society creating a social safety net and protecting and helping each other. Call it what you will I would rather pay extra to live in that society then one where everyone is on their own. In fact, that is not a society at all.

As a Type 1 Diabetic, I would like to know how you believe that I can “negotiate” the price of my insulin. The same insulin I have taken since the 90’s has more than tripled in price. It is fairly rapid acting, and the only type that keeps me in range. There are three companies that make essentially that same product. They all charge the same price and have increased the prices in lockstep with each other. Keep in mind that I and all others with Type 1 will die without injected insulin. It is not a lifestyle disease, it is organ failure. How will shopping that around help me? How will “market forces” help me to “help myself”? Also, “separate but equal” does not work. If you push me off in to a state run high risk pool, and you continue on your company sponsored coverage, do you really think I will get good care? (hint: that is were we were 10 years ago….waiting lists, exclusions, etc. were the rule). And if I don’t get good care, will you care and be willing to join the fight with me? Or will it only be me and the insulin dependent minority that suffer in silence? So forgive me (or don’t) that I believe healthcare needs to be a shared problem, so that we can ALL be encouraged to work towards shared solutions.

I’m not sure to whom you directed your question but from my perspective creating a safety net can be done through insurance premiums and taxes. And in fact should be both. But the marketplace (insurance premiums) requires that those who are healthy have insurance to defray the costs of those who have health issues.

Even with a higher deductible than your max contributions, an HSA is still worth it for those that are pursuing FI. Most folks probably have a rainy day fund or emergency money they can get their hands on to pay a large deductible or use their HSA contributions to help with that amount an then tap into other resources.

Certainly a high deducible plan is something that everyone needs to consider with health factors and spending habits but as for me, I still love it and will continue to contribute the max every year. We’ve set aside enough to cover a deductible outside of the HSA contributions and hopefully others will plan for something like this as well.

One thing that was overlooked that could have been included in your analysis is that qualified out of pocket health care expenses (including premiums) that exceed 10% of your AGI can be deductible. So even though your HDHP ded can exceed HSA contribution limits in a given year, there can be some tax relief area for some if their expenses run high. For an average earning family, this is something to consider. https://www.thebalance.com/deducting-health-insurance-3974024

The issue with that plan is it’s only deductible if you itemize. With the new tax law, very few people will be able to itemize, eliminating that benefit entirely for most people. I’m sure that’s why she didn’t include it.

Thanks for pointing out that HSA’s don’t lead to “smart shopping” and that in terms of being an investment vehicle they have very high fees.

However, as part of the cost equation you’re missing out on the cost of the premiums. Unfortunately, most of us pay a lot more than $2-$30/month, even for an HSA, let alone a non-HDHP. My husband’s employer through which we get our health insurance has set the non-HSA plan premiums so high that unless you have a chronic health condition you’re coming out behind in terms of total costs (premium + deductible) to chose that. So, so far we have chosen to go with the HSA plan since in the majority of cases we will come out head on total cost (e.g., the high PPO premiums are gone no matter what).

Yep. My premium is $335 per month from the ACA for a HDHp. If I were to go on my husband’s plan at work we’d pay $1500/month for an HMO or 700 for a HDHP. Luckily his work has a better deal for him and the four kids. We pay at total of $1000/month for our plans plus HSA contributions of $6900/year. Healthy and young and done having babies tho.HDHP still cover vaccines and things for the kids for free. If I was planning to have a baby I’d be on a different plan for sure. So once we start getting older we will be switching for that same reason .right now it’s more of an emergency fund.

Low deductible plan here, and while all the hype about HSAs lately have had me feeling a little bit left out, I will gladly keep the plan we have and put those savings in other places. We have an especially good deal because our health insurance is covered by my employer.

The HSA plan we have through my husband’s job has much lower deductible and out of pocket maximum numbers than those Covered California plans. When you compare our HSA plan to the others his employer offers, it’s a no brainer because the premiums are lower and the employer kicks in money to the HSA to sweeten the pot. We go to the doctor anyway regardless of cost and often easily hit the deductible, we still come out ahead.

I do think that HDHP plans are not the be all end all for the reasons you describe though. They’re riddled with fees and the contribution limits just aren’t high enough for many of the plans they go along with. Also, in early retirement, contributing to one isn’t nearly as useful of a tax deduction than it is while working.

I wanted to stand up and cheer when I read your post. Finally a post outlining the drawbacks of the highly-touted HSA’s. A few years back I switched our family to an HDHP and fully funded my HSA. After each of my kids were hospitalized over the course of 6 months straddling two calendar years, the $20K+ in HSA I saved was gone within 6 months. You highlighted the high deductible, but you also need to consider the max out-of-pocket. One hospitalization or visit to an ER will probably result in not only hitting the deductible, but probably hitting the max out-of-pocket. I also agree on your point that high deductibles are good options for auto and home, but not necessarily medical. The reason is that the probability of someone having a catastrophic auto or home event is low. However, medical emergencies or a trip to ER are not rare (especially if you have kids). And it only takes one ER visit (for even something that turns out to be minor) for you to be out thousands of dollars for the high deductible and max out-of-pocket costs. Over the course of a lifetime, I doubt whether the tax savings will offset the high deductibles and high out-of-pocket costs you’ll incur with HDHP’s with HSA’s. Needless to say, I would have saved thousands of dollars being in a traditional health plan, but hindsight is 20/20. I learned my lesson and now realize the huge risk of the HDHP plans that others need to consider.

This analysis is excellent. I currently have a HDHP/HSA that I switched to solely because I’m young and pretty healthy and wanted to use the HSA tax benefits to save money for our next kid. However, my husband and daughter are covered under his traditional health insurance plan.

We’ve been considering self-employment and looking at the insurance implications of that for our family. *If* we take that plunge, I was leaning toward the HDHP route for our whole family, but after reading this you’ve given me a lot more to think about!

We have an HSA/HDHP because those are the only options available through our employers. So every year since that’s been our only option, we’ve picked one of the HDHPs and then maxed out our HSA amount. As you mentioned, the deductibles are pretty high, much higher than the minimum required amounts. Luckily, our employers will contribute some money into our HSAs, but it’s still quite expensive.

I very much agree with that whole “scarcity mindset” issue of HDHPs. Afraid to go to the doctor for something that might cost money because you know you’re on the hook for it (and you don’t even know how much it will actually cost you). I know the intent of these, like you said, was to force us to act like consumers and shop around, but it’s not easy to figure out what things cost, or if other expenses will show up!

I’ll continue to use our HSA to pay for our medical expenses (rather than saving it for future expenses). Luckily our OOPM aren’t too terrible, so at least we wont spend too much beyond our deductibles.

One last thought, I *know* we’re supposed to invest our HSA, but for now, it just sits in the account earning minimal interest. Would love to hear more from people who invest their funds while still planning on using them near-term. I’m hesitant to invest it in case it drops!

This is something I debate every year when signing up for benefits, as my employer offers both a PPO and HDHP. I’ve chosen the HDHP every year, hoping that nothing big happens. I’m now at the point that I have about two years of the OOP saved in my HSA but the first couple years had me worried.

You could write entire post on what prevents people from seeking care, but I just had to chime in on something I don’t see mentioned yet: You never know if everyone within a procedure will be in-network. Surgery is a great example of this. You may be having it performed at a hospital affiliated with provider that’s in network but there may be someone (i.e. anesthesiologist) who is out of network. It’s so hard to ensure everything is in network ahead of time and I can see people delaying procedures because of it. If I’m sick, would I really have the time to organize everything so it’s the lowest cost? Not likely.

I had to get my first mammogram this spring and actually debated skipping it. While it should be free and the nurse taking the images is in network, there’s no way for me to guarantee that the person reviewing the images would be in network as well. It’s this kind of thing that prohibits patients from getting the care they need, preventative or not.

I have invested our family’s HSA funds through Lively. For around $30-$35 a year you can open up an account through Lively at TD Ameritrade and have access to a virtually unlimited number of funds and EFTs. Tanya is correct however that there are many additional fees in addition to that $30 annual investment fee. Although I am and probably will continue to be a fan of HSA accounts for a good number of people (certainly not all people), Tanya is correct in that the accounts are generally riddled with fees. An argument can certainly be made that HSA accounts are really valuable for those people that don’t need them.

But isn’t it hard to shop for prices? We’ve had 1 birth already, the hospital couldn’t give us an estimate, we had to go physically to the billing department and ask them and yet, they wouldn’t commit. If it wasn’t so hard, people would compare. Or maybe I just don’t know how?

I don’t have a HSA option – my company uses the (useless, because, ugh, use it or lose it is a *terrible* design) FSA instead. And I’m lucky in that my non-profit pays for a “Cadillac” plan (<-hate that term) that is very low cost to me.

In addition to the inability to even find prices, so how can you possibly comparison shop, there's a bigger issue that's not quite touched on in your post: we aren't the professionals. We don't know enough to know what to "shop" for. I don't know what medical procedures my cough might lead to – it could be a viral cold, pneumonia, or cancer. On top of *that* is the value part: how can I know if I need the procedure the doctor wants? Sure, I can get a second opinion, but a) that's another expensive visit and b) if they disagree, how do I break the tie? Again, I'm not the professional, but I want the best outcome – I just don't have the knowledge to decide where to cut expenses and where to spend because my quality of life is worth it. I don't feel like I should have to make that choice, either. I *want* to defer to the professionals! That's why they spent a billion years in school and I didn't!

The research rings true for me. I don’t visit the doc’s very often, because I don’t want to spend the money. I have two issues right now that should be looked at, but why? I’ve been burned w/ medical bills before. It doesn’t seem worth it. Although, your post as convinced me otherwise.

to me it’s just another restricted account. we have one but only what my employer contributes. it’s basically giving me back my premium where we give each other 20 dollars. i’ve said it before, but care shouldn’t cost so much, either. it’s that last crappy sickly year of life where the cost inflation lies. and the insuance for the insurance that then has to be insured. and we can sue for a zillion dollars over an honest mistake and nothing remotely willful. screw it, i’m making myself want to move to montreal.

Thanks so much for this analysis, Tanja. I’m still of the mind to continue with an HSA plan for now, yet, I know I have to reevaluate each year. I’ve gotten ACA health insurance for four years now, and each time I’ve selected a plan with an HSA and contributed the maximum amount. My carrier is Anthem here in Virginia. Yes, my deductible is high: $4,900, and my annual out-of-pocket maximum is $6,650. But I find that reasonable in the sense that if I get really sick, or have a terrible accident, the most I’m going to pay is $6,650. Of course, there’s the whole in-network, out-of-network unknown that could be disastrous if I’m unconscious and hooked up to machines without knowing who’s in- or out-of-network. For routine check ups or illnesses or injuries, I seek care in-network, but I’ve gone out-of-network too. I absolutely think about the costs of seeking medical care, but I don’t restrict myself. I also do most of the preventative care that’s 100% covered by my insurance. I’ve used Elements Financial all four years for my HSA. It’s a straightforward savings account; I don’t consider it an investment vehicle, I consider it part of my health care plan. I regularly take out money to pay medical expenses, but have been able to build it up somewhat over the past few years. I’m lucky and thankful for that. But who knows what next year, or even next week, or tomorrow could bring? That’s been my idea all along with having an HSA: to create a health care cushion to draw upon, especially during years when I’m not healthy. I really believe health care coverage is the big UNKNOWN. We all can weigh options, and choose plans and doctors, yet only do so much to control our own individual costs. And of course, we only can do so much to control our own individual health.

An HDHP is my only option at my current employer. I can pick $7250 deductible for cheap or a $4000 deductible for $4000 more coinsurance. Try doing that math and see if it makes sense. There is no company HSA contribution. It is one of the reasons I am heading out.

Thank you for writing this – I could NOT agree more!!! I finally got my husband to run the numbers and ditch his employer HSA and HDHP because it is such a bad plan from a coverage standpoint. I make the comparison to those 401k plans that charged such high fees that average people were never seeing much in the way of compounding returns – I think insurance companies are offering such lousy coverage through the HDHP plans that people aren’t getting the care they need and employers love it so they can spend way less (and a fixed amount) on their employees health care costs… 😩

Frankly our work plan options suck. The HSA is by far the better deal since the low deductible plan costs way more then we spend on health care a year. I do find and have to watch out for the psychology you mention. But I think for a young healthy person an HSA will on average lead to better outcomes. An old person with health problema perhaps not so much.

I am wholly able to afford paying my $3,000 deductible every year. But when the doctor says, you need this test, when the test is painful, it takes time away from your job, and there’s a low probability that the test will actually find anything bad, I’m very unlikely to get that test. At $850, I’m definitely not.

Health insurance is one of the reasons I am really hesitant about returning to the US. While the health coverage in Japan (where I currently live) certainly isn’t perfect, employees are automatically covered, or you can opt for national health insurance for pretty reasonable fees.

It seems like especially in the FI/FIRE community, we are reluctant to pay for things. But it’s even harder when some places don’t accept certain insurance plans. I will admit that I cut myself on a rusty ax (it wasn’t as bad as it sounds) and thought I should go in and get a tetanus shot because I couldn’t remember when my last one was. I went to Walgreen because the I read I could go in quick, without an appointment, but they didn’t take my insurance and it was going to be more money than I was willing to pay. So I left and on my way out, I thought “I’ll probably be ok without one…” I can’t imagine that for a heart issue, but I’ve been to the hospital for chest pain that ended up being nothing and it hit my wallet for about $1,500. Not fun…

It is just one more area where you have to run the numbers and understand your options. At my last company, when comparing premiums and MAX out-of-pocket between PPO and HDHP, the HDHP was the clear winner. Premiums+MAX OOP for HDHP was less than premiums for PPO so really – why wouldn’t you? I was shocked at the amount of people who “ran the numbers” and the PPO was better. It wasn’t, I know as I was part of the team that set it all up, but people have a comfort level. I like that this is what you addressed in your article and that peoples comfort influences behaviour. Now I’m self-employed and on the exchange but fortunate enough to be extremely familiar with how to evaluate plans. Premiums for a PPO for our locale and family size are just outrageous and they have similar deductible/OOP issues that people don’t understand/recognize. The actual deductible and OOP are in ALL plans – that is why there are comparisons. More communication and education that there are no one size fits all and that a little bit of time needs to be spent on these things.

This! I do the same thing every year. As long as you don’t have a special situation where you will have to use expensive out-of-network care, the lowest deductible HDHP is almost always the best option. It has the lowest overall maximum cost to you in the worst case scenario and a slightly more expensive cost than the cheapest plans in the best case scenario.

A major issue with all medical plans is individuals need to be financially responsible. Create an emergency fund specifically for medical spending. Contribute to it every paycheck and don’t dip into it for any other reason. Using an HSA for the tax benefits is good as long as the fees don’t offset the tax savings.

Of course, you overlook the effect on the overall price level of more peopleare opting for HSAs and forgoing care. (Much of which they really don’t need.) When there is less demand for care, it actually reduces the overall cost of medical care for those who actually need it, so I would argue this is a good thing. Also, you omit the fact that HDHPs have no maximum benefit — all costs beyond the deductible are covered, so it truly is a great option for genuinely needed catastrophic care.

That’s not true. When people forgo preventative care, it increases costs in the long term because people who don’t get preventative care become sick people, and treating sick people is many times more costly than preventative care.

Sarah, I would argue that what you say is true some of the time, but definitely not always. In general I do agree that with most products and services, less demand will equate to a lower price, assuming of course that the supply of that product or service remains constant. And assuming of course forces aren’t present that distort the market (read Obamacare, Medicare, etc.)
A colonoscopy exam comes to mind. I get one every 5 years like clockwork because I had several relatives with issues. However, the fact is that the majority of the population will never get colon cancer. Forcing 100% of the public to get colonoscopy exams every few years is wildly more expensive than treating the colon cancer of those relatively few members of society that get cancer.
The rub of course is that you could be one of those getting cancer. I don’t want to be one of those so I allocate funds that could be used elsewhere or saved for retirement for colonoscopy exams.
Healthcare. like any other product or service, should be purchased or not purchased based on the needs and wants of the individual receiving the product or service. For healthcare, food and shelter I believe we should provide a safety net for those who for whatever reason are unable to acquire these items for themselves through programs like food stamps, section 8 housing, etc. And these programs can always stand to be improved. And to me a program for health care (care – NOT insurance) should be available for the most needy. For the rest of us, let the market work.

The myth that preventative care saves money is strongly believed, but has little support. It is cheaper for the particular person who finds a polyp that would have turned cancerous. But for society, it is expensive because it pays for hundreds/thousands of colonoscopies/biopsies for that one that was actually beneficial. And we will all die. And for many of us, the last few months will be expensive unless we get lucky and just have a big fatal heart attack/stroke/get hit by bus/etc.
None of this is arguing against preventative care. Just saying it doesn’t save money.

I’ve tried to be one of those mindful consumers. Calling the estimate line, comparing the options between different in network providers. It’s all madness.

The high deductible has 100% changed our health care behavior by grouping expenses into the same year. Hubs hit his deductible mid year last year and everything got much cheaper after that. Another surgery? Sure! It’s 80% off! On the other hand, I’ve been alarmingly healthy (how??) and have had near 0 medical spend the last few years. I haven’t avoided any necessary care bc of that but I am waiting on some elective procedures.

I’ll admit that I am guilty of this. We have a HDHP and although I do go for my free annual preventative visits I try my best not to go any other time. I actually had a concussions this winter from snowboarding that I ignored (bad idea by the way) and then didn’t want to go to the doctor as it knew it would be out of pocket, even though my HSA has plenty of money to pay for the costs. It’s funny how a HDPH disincentives an insured actually going to the doctor when they really should.

You make some very good points about HSA’s but you miss many realities.

You talk a lot about “choosing” an HSA but in reality most people don’t have that choice. They are forced to get an HSA because of the lower premiums and their income situation. Most Americans make less than $50,000 a year and work for small businesses that don’t match anything, let alone pay for health insurance.

I have an $8000 deductible and, believe me, I shop around for services. My preventative care that I am “entitled to for free” amounts to a single visit to my primary care physician once a year — and it doesn’t cover simple tests like an EKG or a urinalysis. The only reason I know this is I was billed for these services after my “free visit” and when I inquired from both my physician and my insurance company they listed off dozens of things that are not covered for my annual “wellness” visit.

Shopping around for price I find one doctor charges $400 for a procedure while another charges $600. I found myself considering whether I really want to get the cheapest service at the cheapest price yet possibly get the most unqualified doctor. I also found getting actual costs from doctors is near impossible as they resort to giving estimates (after pulling teeth from receptionists and billing staff), hemming and hawing about unknown insurance reimbursables, unknown costs, HIPPA privacy or simply “we don’t do that” attitudes.

America needs to stop this current circus, putting its citizens at risk and simply provide healthcare to all.

It is true that in many cases options are limited especially when one is restricted to choices offered by their employer. In a sense, you have no choice at all – your employer has all the choice. I am right with you that the circus needs to stop, but I disagree with your solution. I prefer that I make a choice that I feel is good for me – or in concert with my spouse if I am married. I do not care for a “solution” forced upon me by either my employer nor my government.
I am always curious as to why people think a government provided solution would be best. It very well could be that it would be best, but I seriously doubt it. Your nervousness about getting an unqualified doctor certainly wouldn’t be absolved. There will be multiple doctors under a government provided solution just as there are multiple doctors under the circus we have now. You could still end up with a bad one.
I’ve said it multiple times in the comments of this particular article and will always believe this. We have something like 310 or so million people living in this country each with different needs and wants. The chances of a group of “professionals” either employed by government or by industry coming up with a “solution” that will work for all of us is non-existent. Even coming up with a solution for the majority of us is incredibly slim. We are all different people. We would never accept a government solution for “fair” distribution of food, housing, television sets, etc. We each need or want what we need or want. Why would we be willing to accept it for health care?
I think a better solution would be to “free” the insurance industry from the employer and from government. Don’t prescribe mandatory coverages that I must purchase. Let me decide what I want and allow me to purchase it or purchase care directly from a medical professional and not have insurance if I so choose. If I am able to show that I have millions of dollars net worth and can afford any emergency medical care (pick a number that works for you) then maybe I should be allowed to “opt out”. If I am deemed to poor to purchase a health policy, then I can be on medicaid just the same as food stamps or section 8 housing.
There would obviously have to be some limits on these choices. But surely reasonable people can work that out without resorting to a wholesale government takeover of 1/6 of our economy.

Curious why you’re bothering to debate folks if you “will always believe this.” I respect your opinion and appreciate you interacting here, but if you’re going to continue to respond to people, please use a name on your comments. I’ll delete future comments marked “anonymous.” Thanks.

I have always provided you with my actual name in your e-mail field, but have been reluctant to put my name out on the internet for the greater world to see. I’m also not on Facebook, Twitter, Pintrest, or any other social medial site. Except LinkedIn. I got on there one time when I was looking for a job and a recruiter said it would be of benefit in the job search. I guess I’m just tiptoeing my way into the world of less privacy and have been reluctant to jump completely out there. However, it’s your blog and I’ll follow your rules.
My name is Tim.
And I do enjoy your writing. I am looking forward to your book. Keep up the good work.

As a single, healthy guy the HDHP HSA makes sense for me especially when the deductible is $2K and I pay roughly $100/month in premiums and get a free $750 through my employer. I’ll likely only reach that if something major happens and the rest I have an emergency fund for.

If I get a family that deductible jumps to $4K but I also get a free $1,500 from my company as wel so it would definitely be a tough decision to make especially considering how it could have potentially harmful effects. I think each person will have a decision to make given their circumstances since there is no standard health plan and they all vary wildly by employer.

We only have high deductible plans from our employers so no choice there. For now we pay out of pocket for expenses and are letting the money grow. While there are some high fee choices, there are a few index funds to invest in too.

I had a high deductible plan with an HSA at a former employer for a couple of years until I realized that I was actually losing money due to fees. Any interest I gained was eaten up by quarterly fees and there wasn’t enough of a tax advantage for me to make up what I was losing. So I got rid of it, pulled the money out and chalked it up as a life lesson learned. Never again.

Hi guys. Well I almost always agree with everything you say you were way off base on this one. I have been self-employed/early retired for over 25 years dealing with the self-insurance United States health market. Not once in that time. Has a low deductible policy ever been affordable.

What the HSA does is take that $7000 off my taxable income. I didn’t take it out and spend it on deductibles and healthcare every year. It is not sitting in the account growing. But the approximate 20% off my taxes is very helpful and worth the time and trouble.

Well the idea of a low deductible health insurance plan is lovely., It has never been practical or possible for my family to afford.

I have an HSA and I totally took advantage of getting free immunizations, wellness checkups, and even got a free colonoscopy. That’s why the ACA is quite beneficial, it forces insurers to pay for some preventative care even if there’s a large deductible.

I’m glad you picked up on the article in the Journal of Quarterly Economics. Some time ago, I heard an interview with Chandra (second author on the paper you cited) who expounded on the thinking in the article. Essentially, as it stands today, the ability to price shop for medical services is so limited (and of course confusing based on third-payer systems), most would be better off opting for a lower-deductible plan. From personal experience, this is obviously true.

I also agree with the conclusion (though we’ve always had a HDHP except starting recently, since we are healthy and with giving birth it works out better to go HDHP when you’re paying full price for premiums… at least that was always the case with us).

That said, I don’t think a “market” for medical care is an absolutely lost cause. I think with reasonable search tools, most people who are responsible for a portion of their care will seek the best prices. Honestly, I’m baffled that insurance companies don’t provide price comparisons as an easy service. Stuff like knee surgery, blood tests, scans, prescriptions, labor and delivery and even cancer treatments should be easy to price and quality compare from an insurance company’s website (or at least submit a query, and receive a personalized report within 24 hours).

Anyways, that’s me ranting. I’ve already submitted my ideas to four different insurance companies, three of which have folded, so I suspect they either didn’t listen, or my idea is no good.

I have noticed that many employers have made it cost prohibitive to stay on traditional plans in their quest to transition employees to HDHP options. This is ultimately hurting the consumer of health care. Regardless of whether your deductible is $5K, $8K, etc.; we all risk falling into the trap of not obtaining healthcare, as the study references, and simply reducing the frequency. This is more compounded by the fact, as many posters have referenced, that we are unable to shop around due to the opaque nature of the industry pricing. For example, I am on a HDHP and recently wanted to go see the doctor. I called a couple of providers and ask one relatively simple question – If I provide you with a common procedure code for an office visit, can you tell me the price you would charge for a cash paying customer? Another related question – If I provide you a common procedure code for an office visit and I have XYZ insurance, what is your negotiated rate with them? You would have thought I asked them the formula to split an atom – no one could answer these simple questions BEFORE the visit. Totally broken system! :).

It’s taken me nearly a week to get through this article. We have never had an option to get an HSA so it’s been a bit of a mystery for me.

Between the ever rising cost of health care and education, it is starting to feel like traditional expenses like home, transportation, etc. have new competition. At least education can be managed a bit.

I love articles like this that give a contrarian viewpoint and make me at least question why I am doing what I am doing. I personally have taken advantage of an HSA every year I have been able to and have built up a sizeable balance (around $67k). I cash flow all medical expenses with the intent that I will let this balance grow and use it in retirement where studies show that we spend around 250k/person in medical care.

I can see the risk of avoiding Healthcare visits if you are on the hook for the payment but so far that has not affected me but it is something to be cognizant about.

Used properly I think the HSA can be the best retirement vehicle with triple tax advantage that you talked about.

My family of five benefits from an HDHP and HSA but not because we save by not going to the doctor. Due to our health circumstances and the number of people in our family, we actually spend a lot on health care and therefore we always hit our deductible, usually around May or June each year. Doctor and prescription drug costs are then covered for the remainder of the year. We are fortunate to have a relatively low deductible of $3,000. I’ve detailed our numbers and how we invest our HSA funds on our blog.

While I’m a big fan of the HSA, I’m currently traveling on vacation and have not been feelingly well. When contemplating whether or not to go see a doctor, the question did come to mind . . . “Will this be an out-of-network expense and therefore I’ll have to pay for it?”

Such thinking supports Tanja’s point that HDHPs may cause us to not seek the medical attention that we need in order to not spend money. Normally this doesn’t apply to the my family because we spend so much on health care and quickly hit our deductibles, but I’ve just experienced that health-vs-cost decision that many people likely face fairly often.

I had read that story about the Harvard doc when it was first published and had the same thought–that his HSA made a smart person do a stupid thing (I am another health policy wonk, BTW). I switched to an HSA for the first time this year but my deductible is $1,500 which I am fine with. If it had been significantly higher, I would have had to think harder about it.

I switched to an HSA this year, mainly because the OOP max was the same on it as on the non-HSA option, my portion of the premium was lower, and the company contributes $1,500 to my HSA. As a 50+ year old type 1 diabetic, I will always pay out all of my deductible just for “routine” care, unless it goes north of about $10K. I burned through my deductible quickly this year as expected, and am now in the “free” portion of the year. Given that my company is not particularly stable, I will now hoard and spend on anything I can forsee needing medically. So the idea that HSA’s will make us shop around (not that we can since prices on so many things are fixed or out of our ability to choose) or somehow conserve healthcare is definitely not true for me.

Great post, thanks. We are on a HDHP and it has been working well, but I do feel the potential bias to minimize doctor visits in order to reduce costs. You provide a lot of evidence that people on HDHP’s consume less healthcare, but I’m curious, is there equally strong evidence that people that switch to HDHP’s become less healthy?

I wanted to thank you for this post. It was a big wake up call for me. I’m in my mid 20s and had invested my Hsa in an index fund, accumulating $25k in it along the way.

But I wasn’t using any of the services of the plan. Mine happens to be a really good hdhp and I was so afraid psychologically of using it. I got a free physical and blood work done and found out that a couple of my stats were borderline but fixable. If I let them go longer it could have been a different story.

I completely agree with you and have experienced it first hand. Thanks again for posting this. Very eye opening to me.

Thank you for sharing your experience! As you saw from the post, a HARVARD RESEARCHER didn’t want to get his potential heart problem checked out, so you’re certainly not alone. But now that you know this tendency, I hope you can fight it and keep up on your preventive care!

HSA is an excellent medical hedge if you wait long enough. At age 65 you can use it to pay Medicare A, B and D. In addition you can use it to pay a HMO supplemental (not MEDIGAP). You’re spouse can use it also when they hit 65. Properly invested over 25 or 30 years the compounding is not trivial. $25K left to grow over 30 years is $150K of which 83% is accumulated interest. If your medicare expense and qualified expenses as a couple is $10K per year, that $10K does not count toward taxable income for the year. What you have done therefore is created tax free medical money to support you in a time of reduced ability to generate income and possibly a time of increasing taxes as is caused by RMD. RMD will kill your tax picture and it’s really bad when a spouse dies and the survivor now has to file single payer. You loose a spouse, your spouses portion of SS income, gain a higher tax bracket, loose half your tax write-off and probably are left with a pile of medical bills for your now recently dead spouse. A little pile of possibly tax free money might just be the ticket. I guess if you plan to die young a HSA probably isn’t a good deal, BUT if you plan to die old, this really is a good tax deferred maneuver. At 65 you can pull out the accrued money penalty free for any expense not just medical (note penalty free taxes still apply). If non-medical you will have to pay ordinary income tax on the non-medical part of withdrawal. The argument you will “have to sell when the market is down” is specious. If you have $150K at age 65 growing at say 4% and take out 10K per year you can pull out that 10K for 24 years before you’re fund goes bust. That takes you to age 89. If you die your spouse can pull out 6K tax free per year to pay for their medicare forever.

I’ll admit that I am guilty of this. We have a HDHP and although I do go for my free annual preventative visits I try my best not to go any other time. I actually had a concussions this winter from snowboarding that I ignored (bad idea by the way) and then didn’t want to go to the doctor as it knew it would be out of pocket, even though my HSA has plenty of money to pay for the costs

Thanks for sharing that! It’s interesting to see even DOCTORS and HEALTH CARE ECONOMISTS fall into the mindset trap of the high deductible, so you’re certainly not alone. But I do hope you’re working hard to put your health above money. :-)

Another problem with HSAs is that the money can become captive. What happens when a switch is made to health insurance provided by a spouse’s employer? There is no way to get your HSA funds out of the HSA account early without facing the 20% penalty. What if you don’t like the fees that eat away at your “investment”? There is nothing you can do about it because you cannot transfer from your HSA account into a spouse’s HSA account. So sure, you can go purposely break your leg or something and incur qualified health expenses, but that is about the only option, otherwise you have to just leave the money in the account while the HSA can charge you whatever they want because you have no options aside from eating the 20% penalty. It is a huge oversight in IRS rules.

Once upon a time, decent health insurance was inexpensive and widely available to Americans. The financial stranglehold courtesy of corporations and political interests intent on bankrupting the middle class has enabled the acceptance of HSAs, which merely give folks the illusion that they’re saving money through tax breaks when in reality they have to spend literally tenfold today for what they had 20 years ago. Might as well have Thanksgiving dinner served with carrots and a dollop of cranberry sauce but without the turkey and mashed potatoes.

I find that the majority of people have no idea what preventative care and other services are free/no copay and required to be provided by health insurers. This was publicized years ago but rarely now. For example, I find that even my insurer makes it EXTREMELY difficult, for example, to access the list of birth control prescriptions that are covered at no cost. They basically hide the information on the web site, buried in a document that is almost impossible to find. I’m not being sarcastic. Then they change which one is free every year so when you pick up the scrip, it has a copay every 12 months until you dig around and find out which is free (which is required, but they only have to offer a few with no copay). I told my husband that I bet 90% of young women assume the law has changed and there is a copay now and they are paying it. Even discussing this with the pharmacy staff two years in a row, they were UNAWARE that insurance companies were required to cover certain scrips for free, such as oral contraceptives. They thought it was as easy as me calling my insurance to “find out which ones have no copay”. HA. Even my doctor couldn’t access the information from the insurer (she tried). They won’t tell you which is no-copay over the phone, but refer you to the web site to research the “options”. I wouldn’t be surprised if the phone reps aren’t even aware that some are required to be no-copay. My insurer is UNITED HEALTHCARE. They are a major insurer. I can safely assume there are thousands of woman paying for birth control pills that should have them for free. I am an attorney and I continue to research the free option just for the principle of what I consider their unethical behavior (not that I can’t pay the copay). PLEASE do your readers a service and publicize the free care the insurers are required to cover!!!

This is an interesting and well written post but certain aspects do not ring true for anyone who purchases insurance on the individual market or the small business group plans at least in CT. This market was ruined by the ACA. There are no affordable premium options for individuals over 21 (>425/month) or families (>1750/month) and these are Bronze plans. All the options have really high deductibles > $3000 so one might as well go for HDHP which mostly start at $5000 and get the tax advantage of HSA. OOP costs is less for HDHP than PPO or HMO. I do agree that the high deductibles causes people to limit care, I know I do it all the time, not for my children though. I have also “toughed” it out when in an out of network area. We do take advantage of our included preventative care. However, as many have pointed out there is no transparency in the cost of health care so you cannot shop around. It is a very broken system.

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I know this is an older post, but super helpful counterpoint to the holy grail that is the HSA. My workplace is offering an HSA for the first time next year so I’m doing some research to find out what is best for our family.

I’m single and my deductible is $2000 a year for my companies HDHP. They contribute $1000 first of every year, knocking down the deductible to $1000 a year. My premium is only $480 a year. My max out of pocket is $4000.00 a year. Plan pays 95% of medical cost after deductible is met. Plus I can deduct $700 each year on my taxes. I can have all the money in a triple tax sheltered investment account because I can afford to pay the $1000 a year out pocket. Its a good deal for me. I didn’t realize it was that bad for other peoples plans. Everyone needs to review your own personal options before making any decisions, you might have a plan similar to mine.

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